What follows are our general observations and opinions about purchase and sale agreements for California businesses. This is not legal advice, it is not a definitive statement of California law, and every transaction depends on its own facts.
When someone buys or sells a business, the purchase agreement is doing two jobs at once: it moves the thing being sold, and it allocates the risk that the thing is not what the buyer was told. Most of the negotiation we see is about the second job, not the first, and in our experience that is where deals are won, lost and later litigated.
The first structural question is what is actually changing hands. In an asset purchase the buyer takes specified assets and assumes specified liabilities, leaving the rest behind with the seller’s entity. In an equity purchase the buyer takes the entity itself, and everything in it — including the liabilities nobody mentioned. Our general view is that buyers usually prefer asset deals and sellers usually prefer equity deals, and the reasons are mostly about liability and tax rather than convenience.
Asset or equity: what the choice really decides
Asset purchases let a buyer be selective, but they are administratively heavier. Contracts have to be assigned, which means reading every assignment clause to see whose consent is needed — and in our experience the landlord’s consent under the lease is the single most common thing that delays a closing. Permits and licences may not transfer at all. Vehicle titles, domain names and supplier accounts each need their own paperwork.
Equity purchases are cleaner mechanically, because the entity keeps its contracts and licences, but the buyer inherits the entity’s history. That makes diligence and the indemnity package far more important. Where the target holds something genuinely hard to transfer — a favourable long-term lease, a licence, a key customer contract with a strict anti-assignment clause — an equity deal is sometimes the only practical route even where the buyer would prefer otherwise.
Representations and warranties are the heart of it
The reps are the seller’s statements about the business: that the financials are accurate, that there is no undisclosed litigation, that the entity owns what it says it owns, that taxes have been paid, that material contracts are in force. They do two things — they force disclosure during negotiation, and they create the basis for a claim if something turns out to be untrue.
The fights are usually about qualifiers rather than the reps themselves. Watch for:
- Knowledge qualifiers. “To seller’s knowledge” dramatically narrows a rep. Whose knowledge, and does it include what they should have known after reasonable enquiry?
- Materiality qualifiers. Sensible in principle, but stacked across every rep they can hollow out the package.
- The disclosure schedules. These are where the reps get qualified in fact. A rep can be perfect and the schedule beneath it can disclose the exact problem you were worried about.
- Survival periods. How long the reps live after closing. General reps often survive twelve to twenty-four months; tax, title and similar fundamental reps usually run longer.
Indemnity: caps, baskets and where the money actually is
An indemnity clause without a funding mechanism is a promise from whoever signed it. If the seller is an entity that will distribute the proceeds and dissolve, a clean indemnity may be worth very little a year later. This is the point we most often push buyers on.
The usual architecture is a basket (a threshold before claims can be made, sometimes a deductible and sometimes a tipping basket that pays from the first dollar once crossed), a cap on total liability, and carve-outs from both for fraud and fundamental reps. Where security matters, an escrow holdback of part of the price for the survival period is the common answer. Representation and warranty insurance appears on larger deals and shifts the analysis considerably.
We would be candid that on small owner-operated deals the practical enforcement position is often weak regardless of drafting, because the seller is an individual and litigation costs more than the claim. That is an argument for diligence and holdbacks rather than for longer indemnity language.
Earnouts and price adjustments
Earnouts bridge a valuation gap by making part of the price contingent on future performance. They also generate a striking share of post-closing disputes, because the buyer now controls the business whose performance determines what the seller gets paid.
If an earnout is used, the metric needs to be defined with real precision — which revenue counts, on what accounting basis, over what period — and the agreement should say what the buyer may and may not do during the earnout period. In our experience the clauses that work include some operating covenant: no reallocating the customer base, no loading the target with new overhead, some obligation to run the business consistently with past practice.
Working capital adjustments are the other common mechanism, and they turn on the definition of working capital and the target figure. Agreeing the concept without agreeing the target is a common way to end up in a dispute at closing.
Practical points for Los Angeles deals
Two local ones worth planning around. First, the lease. If the business operates from leased premises, the landlord’s consent to assignment or change of control is frequently the critical path item, and some Los Angeles landlords treat a consent request as an opportunity to renegotiate. Start that conversation early rather than a fortnight before closing.
Second, bulk sale requirements can apply to certain asset sales of businesses holding inventory, and where they apply there are notice and timing steps that need to be built into the schedule rather than discovered late.
Talk to us
If you are buying or selling a business and want the agreement read properly — or drafted from the start — call us at (310) 556-9692. We will tell you candidly where the real exposure sits rather than marking up every clause. This is transactional work, so we handle it on an hourly or flat-fee basis rather than on contingency, and we will give you a cost estimate before we begin.
Related reading: our contract review and drafting resources, plus assignment and consent clauses, personal guarantees, and commercial lease negotiation.
This article reflects our own general views and opinions and is offered for information only. It is not legal advice, it is not a definitive statement of California law, and reading it does not create an attorney-client relationship between you and our firm. If you are negotiating a purchase or sale, please speak with a lawyer about your particular transaction.
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